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Here's How P/E Ratios Can Help Us Understand Johnson Outdoors Inc. (NASDAQ:JOUT)

Simply Wall St

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Johnson Outdoors Inc.'s (NASDAQ:JOUT), to help you decide if the stock is worth further research. Johnson Outdoors has a P/E ratio of 15.23, based on the last twelve months. That means that at current prices, buyers pay $15.23 for every $1 in trailing yearly profits.

Check out our latest analysis for Johnson Outdoors

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Johnson Outdoors:

P/E of 15.23 = USD78.35 ÷ USD5.14 (Based on the trailing twelve months to September 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.

How Does Johnson Outdoors's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Johnson Outdoors has a lower P/E than the average (21.3) P/E for companies in the leisure industry.

NasdaqGS:JOUT Price Estimation Relative to Market, January 20th 2020

Johnson Outdoors's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Johnson Outdoors, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Johnson Outdoors increased earnings per share by a whopping 26% last year. And its annual EPS growth rate over 5 years is 40%. So we'd generally expect it to have a relatively high P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

How Does Johnson Outdoors's Debt Impact Its P/E Ratio?

Johnson Outdoors has net cash of US$172m. This is fairly high at 22% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Verdict On Johnson Outdoors's P/E Ratio

Johnson Outdoors's P/E is 15.2 which is below average (19.0) in the US market. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. One might conclude that the market is a bit pessimistic, given the low P/E ratio.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Johnson Outdoors. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.